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This China Center members-only chart shows the credit intensity of Chinese economic growth in both nominal and real terms. Credit intensity refers to the ratio of new credit to incremental GDP growth in an economy. China’s reliance on credit to drive growth has increased significantly in the past decade. What’s more, the economy’s credit addiction has clearly not diminished since the huge lending expansion in 2009 and 2010. 2012 saw credit intensity jump to a ratio of 4.3, from 3.4 in 2011. Of note, almost three times as much credit was required in 2012 to drive incremental GDP growth than was required in 2005.

The positive relationship between credit expansion and growth that has lasted for so long is clearly weakening in China. This means that, looking forward, attempts to goose the economy through monetary loosening and consequent investment will likely be less and less effective, and may even lead to painful corrections.

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